Fortis Healthcare Limited (FORTIS) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and a very warm welcome to the Q1 FY '22 Post Results Conference Call of Fortis Healthcare Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Anurag Kalra, Senior Vice President of Investor Relations at Fortis Healthcare Limited. Thank you, and over to you, Mr. Kalra.

Thank you, Ali. A very good morning, ladies and gentlemen, and welcome to Fortis Healthcare's Quarter 1 FY '22 Earnings Call. The call is being chaired by Dr. Ashutosh Raghuvanshi, our CEO; with him, we have Mr. Vivek Goyal, our Chief Financial Officer; from SRL, the CEO of SRL, Mr. Anand joins us; and he's accompanied by Mr. Mangesh, who is the Chief Financial Officer of SRL. I hope everyone's got the press release and investor presentation that we had released on Friday evening. And I'm going to request Dr. Raghuvanshi to start with some comments on the business, followed by Anand, who will take you through the highlights of the Diagnostics business, and then we can open the floor for question and answers. Over to Dr. Raghuvanshi.

Thank you, Anurag. Good morning, everyone, and welcome to our Q1 Financial Year '22 Earnings Call. Thank you for joining us on the call today. I hope you and your families are safe and well in the aftermath of second wave, which has now significantly declined. Before I move on to the performance for the quarter, a word again of thanks to the endless service provided by our doctors, medical staff and nonmedical staff during the second wave. It has been over a year now, and COVID has seen peaks and troughs. This time around, given the intensity of the pandemic, we faced severe challenges in terms of some medical resources like oxygen. Despite these, our workforce made all efforts to ensure that COVID patients were treated and cared for as best as possible. We are also actively supporting the government to accelerate vaccination effort across the country with 24 of our facilities providing COVID vaccinations. I would also advise a word of caution on a possible third wave, which is currently being seen in some nations globally. While we are relatively better prepared having augmented our medical resources, the impact, if any, on the third wave would also depend on its intensity and the spread of transmission. Let me begin by providing you an update on the Supreme Court matter. As you know, all hearings concluded in the first half of May, and the courts were on a summer vacation post that. They have reopened towards the month of July, and we eagerly await a judgment by the honorable court, which is expected some time soon, probably before the end of next month. With this, let me straight away go to the performance for the quarter. I'm pleased to state that despite the first half of the quarter witnessing a serious second wave of the pandemic, the later half has witnessed a speedy recovery with the non-COVID revenues showing greater traction. This is in contrast to the first wave, wherein despite the fall in COVID cases, elective procedures were slow to begin and took a while to [Technical Difficulty]. The performance for the quarter in both the hospitals and the Diagnostics business has been aided both by the volume of tests and patients related to COVID as well as the faster bounce back of the non-COVID business. Coming to the financial performance for the quarter. At a consolidated level, we have recorded healthy revenues of INR 1,410 crores with 70% coming from hospital business and 30% from Diagnostics. The revenue for the quarter are significantly higher than Q1 financial year '21 and also better by 13% versus quarter 4 of financial year '21. Our overall EBITDA margins for the quarter are approximately 20% versus negative margin in Q1 financial year '21 at around 16% margins in quarter 4 of financial year '21. Our profit before tax prior to exceptional item is a robust INR 180 crores versus a loss of INR 209 crores in the Q1 of last fiscal. This is also a 64% increase over quarter 4 of financial year '21. At the PAT level, we have reported a PAT of INR 431 crores versus a loss of INR 188 crores in the Q1 of last fiscal. We continue to maintain a healthy balance sheet with a net debt-to-EBITDA ratio of 0.9x versus 1.04x at the end of Q4 of financial year '21. Our net debt-to-equity ratio is also similar to quarter 4 of '21 at around 0.14x. A few comments on the hospital business. revenues were at INR 1,006 crore versus INR 488 crores in Q1 last fiscal and versus INR 982 crores in quarter 4 of financial year '21. EBITDA margins were at 15% at INR 50 crores versus a loss of INR 85 crores in Q1 of financial year '21. We saw an overall occupancy of 65% as compared to 37% in Q1 financial year '21 and 64% in quarter 4 of financial year '21. More importantly, non-COVID occupancy improved from 30% in May to 47% in June and continues to become stronger in the month of July, and the trend continues in this month as well. This shows that return to normal is rather quick compared to the first wave. Our ARPOB has also shown a steady improvement with the overall ARPOB at INR 1.62 crores versus INR 1.51 crores in Q1 of financial year '21 and INR 1.7 crores in Q4 of financial year '21. Despite the high COVID volumes, the ARPOB has been robust with the non-COVID ARPOB growing 8.5% to INR 1.97 crore versus Q4 of financial year '21. Our overall COVID revenue contribution to the hospital revenue stood at 27%. In addition to the above, we have maintained our focus on various cost optimization levers and continue to look at a host of matrix, including, amongst other things, pharmacy procurement costs, medical consumables, consumption metrics and other costs related to general and administrative expenses. Cost has continued to be a perineal area of focus and value addition for the team. With the speed recovery witnessed in the later half of the quarter, we have maintained traction on our growth and investment plans. Our bed expansion plans are underway with the current plan to add 1,200 to 1,300 beds over the next couple of years. These would all be brownfield expansions. We have initiated investments in a host of medical equipment, including cath labs, neuro microscopes, new bone marrow transplant units, oxygen generator plants in selected facilities. In addition to the above, we continue to strengthen our clinical workforce by adding in eminent doctors in the specialties of pulmonology, oncology, cardiology and orthopedics. I'm also quite pleased to share with you that our diagnostic business is now on a firm footing. The business recorded robust revenues of INR 441 crores, aided by both COVID and non-COVID test volumes and the consolidation of our SRL DDRC joint venture, in which we have now acquired the balance, 50% stake of the joint venture. Diagnostic business EBITDA margin for the quarter were at a robust 31% versus negative margin in the corresponding previous quarter and margins of 22% in the fourth quarter of financial year '21. While Anand will take through the performance of the business for Q1, I think our diagnostics business is now well poised to further accelerate its growth and profitability. The DDRC SRL JV acquisition has fortified our presence in Kerala as a market leader and also help SRL consolidate its Pan India position as the second largest diagnostic chain in the country by revenue. With this acquisition, we have also significantly strengthened our B2C business contribution, which is now at a healthy 56% versus 45% in Q4 financial year '21. More for Anand to elaborate on later. Just some concluding thoughts before I wrap up. I think we have seen a challenging start to financial year '22, but have seen the business rebound quickly, and I expect the recovery momentum to continue allowing us to show progressively better quarters going forward. The industry has further evolved with the new health care delivery models, a heightened focus on digitalization and increasing opportunities for growth and consolidation. We remain acutely aware of all these and believe are well placed in terms of our infrastructure and capabilities to partake in these, keeping in mind our long-term strategic direction. I would now hand over to Anand to take you through the diagnostic business. Thank you. Over to you, Anand.

Thank you. Thank you Dr. Raghuvanshi and a very good morning to everyone on the call. Thank you for joining us today. On behalf of SRL Diagnostics, I warmly welcome you all to our Q1 FY '22 results conference call. Some of you may be experiencing new cases of coronavirus around you or would be coming out of a very difficult period due to the rising cases in some parts of the country. So I wish you all well. And with all humility and hope, I believe the future holds better days for everyone around the country. Looking at our Q1 numbers, I can only say that we are coming off a very strong first quarter where our revenues grew by 214% versus the same quarter last year to reach INR 441 crores, which is our highest ever recorded quarterly revenue. Our EBITDA stood at INR 135 crores in absolute sum and in terms of margin, at 30.6% for the quarter, which is also the highest ever achieved so far. I'm also particularly happy to let you know that we recorded our highest ever non-COVID revenues this quarter. These were primarily driven by higher volumes. Pandemic has made the world realize the importance of diagnostics, not just in terms of advances in technology, but more in terms of public perception of diagnostics as a critical vertical in health care. This has resulted in a growth spurt in preventive packages. We have seen an increase of 2.5x in our preventive care portfolio versus Q1 of FY '21. Being a true PAN India player with equitable geographical distribution, we were able to serve patients across the country and conducted 1.6 million COVID-19 RT-PCR tests, the highest in the private sector. At the same time, SRL recorded the highest ever B2C contribution of 54% in this quarter, driven by digital initiatives and home collections. Throughout the pandemic, SRL also supported its channel partners to grow their businesses by promoting their services via our digital initiatives. On the M&A and partnership front, in Q1 FY '22, we completed the acquisition of our balanced 50% stake in DDRC SRL Diagnostics Private Limited. This was in line with our strategy to increase our market share in the diagnostic space, especially in the southern part of the country. Operationally, DDRC has been fully integrated into SRL. This acquisition has made SRL a leader in the South, amongst national players and the lab chain with the highest number of pathology labs across the country. We also became the official lab diagnostics partner of the Indian Olympic Association for the Tokyo 2020 and Paris 2024 games. As a part of our collaboration, we conducted pathology tests of all players representing India, coaches, media and government officials traveling to Tokyo for the Olympics. The COVID-19 pandemic has no doubt accelerated the adoption of digital efforts industry-wide, making it essential for health care organizations to adopt new technologies. Technology and innovation, however, is not new for SRL, we have always been early adopters of technology in our category. But now we have seen its adoption has increased significantly across the board, and that can be a major growth driver in the coming years. Therefore, to improve our customer experience, we took some digital initiatives, which resulted in significant growth in home collection. We generated approximately INR 30 crores of revenue through home collection channel and conducted 2.35 lakhs home visits in Q1 FY '22, which is also our highest ever quarterly number. We took multiple initiatives to expand our home collection reach and continue to do so. Currently, we are providing home collection services in 140 cities across the country. Recently, we also revamped our website into an e-commerce website with PWA for a seamless user experience. Our new website comes with features like chatting with experts, searching SRL center near you, booking multiple tests, booking home visits, tracking phlebotomus real time to name a few. We have enrolled ourselves for a national digital health mission and are collaborating with them as a health information partner to collect and verify unique health IDs, link pathology reports with health ID and digitally share pathology reports with other health information users based on patient's consent. All these initiatives are on customer centricity and digital transformation will help us build an organization that is technologically future ready and able to meet the changing expectations of our patients, clinicians and employees in the post-COVID era. All along, we have also worked on improving and retooling our doctor engagement programs, which have helped us forge stronger ties with clinicians. The pandemic has no doubt highlighted the need for extensive RT-PCR testing to contain the virus. And when during the second wave, diagnostic facilities were under severe stress, it only affirmed our confidence that we need to continue our investments in workforce and technology. To cater to the growing demand and prepare ouselves for the third wave, we expanded our existing testing capacity and opened more centers and drive-through sites to collect samples across the length and breadth of the country. We have engaged with corporates in the travel and entertainment sector this quarter to support their safe return to work. As of date, we have built a network of 16 RT-PCR labs across the country. And in Q1, we commenced 111 new customer touch points across the country. Additionally, to support our government in the national COVID vaccination program, we have now started vaccinations for general public in 4 of our centers. Over the last decade, genomics has acquired a prominent position within clinical medicine. We have established an advanced center for genomics at our Mumbai reference laboratory that can provide solutions to clinicians through precision diagnostics in the areas of oncology, reproductive health, infectious diseases and inherited disorders. Apart from this, in Q1, we also launched several new tests like Covinow, Gastro Panel, Mucoreal, Fungi-real, Clinical Exomes, Gene rearrangement studies, to name a few. Looking back at the quarter, I'm happy that we continue to deliver on our mission to contribute to the well-being of the communities we serve by ensuring the continuity of our operations during the COVID-19 second wave. I would like to sincerely thank my colleagues at SRL Diagnostics for their incredible efforts and commitment during these tough times. We also continue to make good progress on our strategy execution by enhancing our development pipelines of both routine and specialized segments, launching new tests, making inroads into newer set of markets, driving productivity and accelerating our innovation agenda. We are committed to improve customer experience through data-driven actionable insights enabling a convenient one-stop shop for all our customers' diagnostic needs. We are well positioned to continue our momentum, delivering profitable and sustainable growth in the coming months. With that, I would like to hand over the call to Mr. Anurag Kalra, Head of our Investor Relations. Thank you for your attention.

Thank you, Anand. Ladies and gentlemen, we will now open the floor for question and answers. Moderator, if you could please take that.

[Operator Instructions] First question is from the line of [ Priyank Gupta ] from [ Guardian Advisors ].

Congratulations to the team for turning around the business and handling this COVID wave for the whole country. My heartiest congratulations. My short question is regarding the diagnostic business. If the management can help us understand if the diagnostic businesses are getting very good valuations now, so any of the investors or the company is looking at monetizing any of its stake in that business?

So for us, it remains a very strategic business. So the other private equity investors are there, they may be doing their own study. But from the company perspective, Fortis side, this will remain as a very strategetic asset for us and there is no plan for divestment.

The next question is from the line of Amit Khetan from Laburnum Capital.

Can you share a little more granular details on your bed addition plans over the next couple of years? So how many beds are going to be operational in which facilities? And what is the growth and the maintenance CapEx for the next couple of years?

Yes, I will take this question. So we have [Technical Difficulty] We have choked out around 1,300 beds, which we'll be adding to the facilities in the next 3 to 4 years' time, okay? And most of this beds -- majority part of this beds expansion is coming in the NCR region in all our major facilities in NCR, where the adjacent land parcel is available and the units are operating at 70% plus occupancy, and we are planning to expand it. Apart from that, there will be a couple of other units like in Mumbai and Kolkata, where there are certain building which was under completion, which we are getting completed and making the bed operationalized. As regard your other question of maintenance CapEx every year, so we planned around INR 150 crores every year as a maintenance CapEx. It is slightly on a higher side because the company was not able to spend much prior to 2019 and there is a lot of accumulated maintenance CapEx. And this we are rationalizing based on the priority of the particular unit. I hope I answered your question.

Yes. And what is the growth CapEx for the next 2 years?

Growth CapEx will be in the range of INR 200 crores every year.

Got it, got it. And can you share the occupancy levels for the month of June and July as well as the non-COVID occupancy for July?

Yes. So that we can share. So the occupancy for the quarter was just 65%. For July, it is 61% because COVID occupancy has come down. But we are [Technical Difficulty] occupancy level from 61% will go up further because of the surgical and non-COVID work has started coming, and we expect very good growth in that

Got it, got it. And lastly, your payer mix has improved significantly in the quarter-on-quarter with scheme patients contributing only 16%. How sustainable is this? And would this be the major contributor to the higher non-COVID ARPOB?

Yes, that will -- our endeavor from beginning was to increase the cash and TPA business. And so we are successful to some extent. And we continue on that line. And mind you this is after taking into account the decline in the international business, which has substantially come down because of the travel restriction and flight restriction in India. So we expect the -- and despite that, we'll be able to achieve this. So there's no reason to doubt that in future we'll not be achieving this.

Sure. So the 16% scheme patients is sustainable?

Yes, 15% to 17%, as I said, there is a growth plan also to some of the units where we are expanding the capacity. There initially, we may have to take the certain -- the scheme patients.

The next question is from the line of Rushabh Sharedalal from Pravin Ratilal Share and Stockbrokers.

Just 1 question on the exceptional gain of INR 306 crores that you have booked in this quarter. So what is this exactly, if you can explain it in a little bit of details?

Yes. So we can explain this. So as you might be aware that SRL -- our subsidiary, SRL Limited, whilst having a joint venture in Kerala in the name of DDRC, okay? So this entity, we were owning 50%, and 50% was owned by our JV partner. In April 5, 2021, we have acquired the balance 50% stake from the JV partner. As per accounting standard, the book -- we need to revalue our investment when we are changing JV to the wholly owned subsidiary and as a result of which, we have to value this -- our existing investment, 50% investment in the DDRC at the fair value, which comes to around INR 350 crores fair value, and the difference is the carrying value and the fair value, is coming in the P&L.

Okay. So it means that the cost of our acquisition for this 50% -- so we have acquired that less than INR 300 crores. The difference is the INR 300 crores, right?

Yes. So what I said, for 50% acquisition, we have paid INR 350 crores. Okay? The additional 50% stake, we have paid INR 350 crores. The existing investment -- existing 50% was carrying in the books at around INR 43 crores, which includes the initial investment plus accumulated results. okay? So that value, we need to reevaluate as per accounting standard. And the value -- the difference in the value was recorded as an exceptional gain in the P&L.

Okay. So 100% of the revenues of DDRC would now be included in our consolidated finance statement, right?

Yes. This quarter includes the DDRC revenue also.

So what exactly is that number? And what is the PAT number, if you can share that for DDRC particularly?

Yes, yes.

So the revenues for DDRC in the quarter are about INR 69 crores. The margins at the EBITDA level are more or less in tune with the SRL margins.

The next question is from the line of Ayush Pansari from Allegro Capital.

So I have a question on the same DDRC acquisition. What I understand was 50% was held by Fortis Hospitals, right? And the additional 50%, which has been acquired, has it been acquired by SRL or has it been acquired by Fortis?

No, the 50% was owned by the subsidiary of SRL. Existing 50% was also owned by the existing subsidiary of SRLD and that subsidiary only has acquired the balanced 50% stake.

Okay. So the entire DDRC acquisition has been made by SRL?

Yes, yes. The entire DDRC through SRL.

Okay. The -- one more question is, what is the additional IndAS impact, IndAS 116 impact because of DDRC? Like I understand the total impact was INR 50 crores, INR 25 crores was hospital and INR 25 crores was diagnostic broadly. What would be the additional impact because of DDRC consolidation?

Yes, that will be mainly because of -- except this one-off item, which I have explained in detail, there will be -- there are certain leases which need to be having the 116 impact. Mangesh will be able to comment on this.

So we are evaluating that. This is a preliminary PPA that we have done right now. And we'll be coming up with a [Technical Difficulty] impacted by during the 3 quarters. So this was a premium impact because of the acquisition as per the studies based on PPAs.

Estimate?

Estimate, we don't have estimate right now. So it will be a very small amount. It won't be a big amount.

Okay. So no major impact on EBITDA because of DDRC is what...

No impact. No.

The next question is from the line of Adi Desai from York Capital.

Congrats again on the excellent quarter and historic highs and EBITDA across both segments. My question is on the SRL. I just wanted to get a sense on, if we on organic revenue and EBITDA growth, if we exclude the impact of the acquisition, what was the real like organic growth we saw both from a year-on-year and Q-on-Q basis, excluding the DDRC kind of acquisition over here?

Without DDRC, we have actually grown by about 21%.

Is that on a Q-on-Q or year-on-year basis?

This is actually we are -- on the sequential -- QOQ, by 164%. If you compare it, I was saying more like to compare with Q1 of FY '20, then it will be 20% -- 21%. Because last...

Right.

Got it. Okay. That's useful. And then so on that, I mean, I wanted -- 1 more follow-up question was on the -- sorry, non-COVID volumes, which, as you kind of highlighted, have increased significantly Q-on-Q. What was the non-COVID volumes, excluding DDRC over here?

Non-COVID revenues, excluding DDRC?

So non-COVID volumes, so non-COVID volumes last year -- last quarter was INR 6.9 million in terms of volumes. And non-COVID volumes for this quarter is INR 9 million. So if I exclude the DDRC volumes, what were the like volumes for non-COVID that we saw this quarter.

Revenue is INR 250 crores.

Happy to take this offline as well. I just wanted to get a sense on organic growth and profitability and revenues and volumes.

Right. It's INR 284 crores. INR 284 crores without DDRC.

INR 284 crores. Got it.

The next question is from the line of Prateek Mandhana from Nomura.

Sir, 1 question on the DDRC, but you told that revenue is INR 69 crores. Is that the gross revenue or the net revenue that...

It is a gross revenue.

So it's the gross revenue.

So sir, what would be the net revenue number for DDRC, if you can share that?

So there is no specific -- from the Fortis point of view, there is no specific net revenue there because it's not part of that revenue generated from Fortis. We will only have a net and gross only for the Fortis generated revenues.

And what would be the COVID and non-COVID split in the DDRC revenue?

So 40% of the revenue is from COVID. But this is specifically if you see the pricing of COVID in Kerala was very high in month of April, but in May and June, it has significantly come down. So I think going forward also, it will be much lesser compared to what it is now in terms of percentage everything.

Okay. And sir, on the margin bit, sir, so what should be like the sustainable margin? Because this quarter, we have seen the margin expanded mainly because of operating leverage, it has gone about 30-odd percent. So what should be the sustainable margins for the SRL business?

So the sustainable steady state margins would be somewhere around 22% to 24%.

Okay. And just some of our peers are having margins somewhere between 25% to 30%. So can we reach those kind of margins maybe some years down the line? Or is this some...

Yes, we are moving forward to that in that direction. So I think in the next couple of years, we'll be reaching those kind of margins.

Okay. And sir, sir, 1 question on the vaccine, which was -- so how much revenue was generated in the hospitals from the vaccine -- vaccination?

The total vaccine revenue for this quarter was INR 45 crores.

[Operator Instructions] The next question is from the line of Shyam Srinivasan from Goldman Sachs.

Just the first 1 on the hospital business. I think in the opening remarks, Dr. Ashutosh said that July, August we're starting to see non-COVID come back, more surgical work come back. So what's the outlook in terms of one occupancy and revenue mix as we look forward? I know there is a -- you also cautioned us about a potential third wave. But -- If you were to look at over the next 9 months, what should we be keeping in mind? And a related question on the hospital is on the margins. I think if I -- as per your presentation, if I were to check even the Chennai part, margins came off Q-o-Q between 4Q and 1Q of 14.7%. So does it have an element of -- you called out INR 45 crores, but is the EBITDA lower there from a margin perspective? Also COVID in the mix, has it also diluted margin?

Yes. So as far as the occupancy levels currently are concerned are in the ranges of between 60% and 70% fluctuating. So I expect that to stabilize to 65-plus within this month and certainly from next month over. Now as compared to the previous wave, it was very different this time, and it is likely to remain different even if there was to be a third wave. And we believe that the occupancy levels should remain generally within those ranges [Technical Difficulty]. So with that in mind, and I think from the numbers we've been able to achieve during this quarter, our belief is that even though there may be a third wave, but it will not have too much impact on our business unless until there is something which is totally, totally unusual. That is regards to the possibility for the next few months. And also, we should see the gradual resumption of the international business, which should also give us upside during the third quarter for sure. And then if there is no third wave, then the fourth quarter should make it even better. As far as the profitability from COVID is concerned, it's certainly lower because of the fact that there are price controls, et cetera, and our ARPOBs typically are lower in the corporate business. However, if we were to take out just the vaccine part of it, then within that, the margins, the profitability is about to the tune of about 28% to 30%. So that itself is not a bad business. However, there is a lot of problem in terms of supply of vaccines to the private sector now. And demand in private sector for vaccines has also come down. that is why it may not be a significant number going forward, both either in terms of top line or bottom line as far as the COVID is concerned.

Just want to get the margin outlook on a longer-term basis. I guess in the past, we have talked about it moving towards 16% to 18%. So can you highlight us whether that trajectory can come through? And what would be some of the drivers for that?

Yes. No, absolutely. You see if we compare with, say, sequential quarters and from quarter 4 to quarter 1, because of the COVID wave, we have seen that our profitability has not grown. However, in spite of the fact that 27%, 28% business came from COVID, the profitability has remained more or less in the same range. So we believe that this is only as the things normalize, the profitability profile will only improve from here on. As far as the triggers for that are concerned, one of them was mentioned earlier, which is a favorable patient mix kept our scheme business always limited, below 17%. And we tend to -- we aim to keep it between 15% and 17%, except when we are having some hospitals where the new capacities may be created. But on a blended basis, we always like to keep it at that level. So that is one of the things. The second thing is for last 1.5 years because of the uncertainties, there were no pricing levers used at all. So there would be some bit of pricing initiatives, which we will be doing. Other than that, we are working on some of the supply chain initiatives that would bring in some things on the savings side.